SEC News Digest

Issue 2012-11 January 18, 2012

Commission announcements

SEC Charges Fund Managers and Analysts in Insider Trading Scheme

Hedge Fund Firms Diamondback Capital and Level Global Also Charged

The Securities and Exchange Commission today charged two multi-billion dollar hedge fund advisory firms as well as seven fund managers and analysts involved in a $78 million insider trading scheme based on nonpublic information about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The charges stem from the SEC’s ongoing investigation into the trading activities of hedge funds. The U.S. Attorney for the Southern District of New York today announced criminal charges against the same seven individuals.

“These are not low-level employees succumbing to temptation by seizing a chance opportunity. These are sophisticated players who built a corrupt network to systematically and methodically obtain and exploit illegal inside information again and again at the expense of law-abiding investors and the integrity of the markets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

According to the SEC’s complaint filed in federal court in Manhattan, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. For his role in the scheme, Goyal was paid $175,000 in soft dollar payments that were deposited in a brokerage account of an individual affiliated with him.

The SEC alleges that after obtaining the inside information from Goyal in advance of Dell’s first and second quarter earnings announcements in 2008, Tortora tipped his portfolio manager at Diamondback, Todd Newman of Needham, Mass. Newman traded on the information on behalf of the Diamondback hedge funds he controlled. Tortora also tipped Spyridon “Sam” Adondakis, an analyst at Level Global. Adondakis tipped his manager Anthony Chiasson, who then traded on the inside information on behalf of Level Global hedge funds. During this time period, both Adondakis and Chiasson lived in New York City.

According to the SEC’s complaint, Tortora also tipped two others at firms other than Diamondback or Level Global with the Dell inside information: Jon Horvath of New York City and Danny Kuo of San Marino, Calif. Horvath caused insider trades at his firm that resulted in approximately $1.4 million of illicit gains. Kuo similarly caused the firm where he worked to execute profitable insider trades in Dell securities.

The SEC further alleges that Kuo also obtained inside information about Nvidia Corporation’s calculation of its revenues, gross profit margins, and other financial metrics in advance of the company’s first quarter 2010 earnings announcement, which was made in May 2009. Kuo again caused his firm to trade on inside information. Kuo’s insider trades in Dell and Nvidia resulted in approximately $270,000 in ill-gotten gains. Kuo also tipped Tortora at Diamondback and Adondakis at Level Global with the nonpublic information about Nvidia. Tortora again tipped Newman, who made more insider trades on behalf of the Diamondback hedge funds. The illegal trades in Dell and Nvidia securities resulted in $3.9 million in illicit gains for Diamondback. At Level Global, Adondakis tipped Chiasson who made the insider trades on behalf of those hedge funds. Chiasson’s insider trades in Dell and Nvidia resulted in approximately $72.6 million of illicit gains for the Level Global hedge funds.

The SEC’s complaint charges each of the defendants with violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and, additionally, charges Goyal, Tortora, Newman, Adondakis, Chiasson, Horvath and Kuo with aiding and abetting others’ violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus and Stephen Larson – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter. (Press Rel. 2012-11)

The Securities and Exchange Commission today published on its website a request for public comment on financial literacy and investor disclosure issues that it is studying as part of a review mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Section 917 of the Dodd-Frank Act directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. The SEC is using qualitative and quantitative research, including investor testing, to help inform the study. To supplement its research, the SEC also is seeking public comment on financial literacy and investor disclosure issues.

Consistent with the Dodd-Frank Act’s specifications for the study, the SEC is seeking comment on methods to improve the timing, content, and format of disclosures to investors regarding financial intermediaries, investment products, and investment services. It also requests comment on information that retail investors need to make informed financial decisions on hiring a financial intermediary or purchasing an investment product or service typically sold to retail investors, including mutual funds. In addition, the SEC seeks comment on how to make investment expenses and conflicts of interest in investment transactions more transparent to investors.

“Many of the issues that the Dodd-Frank Act identified for Commission study directly affect individual investors. As a result, we are especially interested in receiving comments from individual retail investors,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.

The public comment period will remain open for 60 days, following publication of the request in the Federal Register. (Press Rel. 2012-12)

Enforcement proceedings

In the Matter of Lisa B. Premo

On January 17, 2012, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(f) and 203(k) of the Investment Advisers Act of 1940, and Sections 9(b) and 9(f) of the Investment Company Act of 1940 (Order) against Lisa B. Premo of Charlotte, North Carolina.

The Division of Enforcement (Division) alleges in the Order that, during the period from at least March 2008 to early June 2008, the net asset value (NAV) of the Evergreen Ultra Short Opportunities Fund (Fund) was materially overstated as a result of the conduct of Premo, the Fund’s lead portfolio manager. The Division further alleges that in early February 2008, Premo learned that a collateralized debt obligation (CDO) owned by the Fund had experienced an event of default. In late March 2008, the Division alleges, Premo learned that, as a result of the event of default, the CDO would no longer make payments to the Fund, but she did not convey this information to the Evergreen Valuation Committee (EVC), which had been charged by the Board with the responsibility of calculating the value of Fund holdings. The Division further alleges that when, in early June 2008, the EVC became aware of the event of default and the payment stoppage, it reduced the aggregate value being assigned to the CDO from approximately $6.98 million to $0, resulting in a $0.10 per share drop in the Fund’s NAV that set in motion a sequence of events that, within a week, led to the Fund’s liquidation. The Division also alleges that by failing to convey to either the EVC or the Board itself the material information she possessed concerning the value of the CDO, Premo breached the fiduciary duty that, as the Fund’s portfolio manager, she owed to the Fund. As a result, the Order alleges that Premo willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and willfully aided and abetted and caused (1) Evergreen Investment Management Company, LLC’s violations of Sections 206(1) and 206(2) of the Advisers Act; and the Fund’s violation of Rule 22c-1(a) promulgated pursuant to Section 22(c) of the Investment Company Act of 1940.

A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations in the Order are true, to provide Premo an opportunity to dispute the allegations, and to determine what, if any, remedial action is appropriate in the public interest pursuant to Section 203(f) of the Advisers Act and Section 9(b) of the Investment Company Act, whether pursuant to Section 203(k) of the Advisers Act and Section 9(f) of the Investment Company Act, Premo should be ordered to cease and desist from committing or causing violations of and any future violations of Sections 206(1) or 206(2) of the Advisers Act or Rule 22c-1(a) promulgated pursuant to Section 22(c) of the Investment Company Act, and whether Premo should be ordered to pay a civil penalty pursuant to Section 203(i) of the Advisers Act and Section 9(d) of the Investment Company Act. The Order requires the Administrative Law Judge to issue an initial decision no later than 300 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice. (Rels. IA-3355; IC-29919; File No. 3-14697)

In the Matter of Charles Mark Hall

On January 17, 2012, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Charles Mark Hall (Hall). The Order finds that Hall, a previously registered representative of two registered broker-dealers, pleaded guilty to twelve counts of embezzlement by an insurance agent, one count of embezzlement of property received by virtue of office or employment, and two counts of exploiting the trust of a disabled/elderly person in violation of N.C.G.S. §58-2-162, §14-90, and §14-112(B). Hall was sentenced to two 60-to-81 months prison terms to run consecutively, work release at the discretion of the North Carolina Department of Corrections, and ordered to make restitution in the amount of $2,840,594.56.

Based on the above, the Order bars Hall from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. The Order also bars Hall from participating in any offering of a penny stock, including: acting as a promoter, finder, consultant, agent or other person who engages in activities with a broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock. Hall consented to the issuance of the Order without admitting or denying any of the findings except he admitted to the Commission’s jurisdiction over him and to the subject matter of these proceedings. Hall also admitted that the General Court Of Justice, Superior Court Division, Johnston County, North Carolina entered judgments against him after he pleaded guilty to all of the above-described criminal counts. (Rel. 34-66162; File No. 3-14698)

In the Matter of Gregory Bartko

On January 18, 2012, the Commission issued an an Order Instituting Administrative Proceedings Pursuant to Section 15(b)of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940 and Notice of Hearing against Gregory Bartko (Bartko) based on his criminal conviction in the U.S. District Court for the Eastern District of North Carolina (United States of America v. Gregory Bartko, No. 5:09-CR-321) and an Order of Suspension Pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice forthwith suspending Bartko from appearing or practicing before the Commission as an attorney based on such conviction. (Rels. 34-66181; IA-3357; File No. 3-14700)

SEC Charges St. Louis-Based Private Investment Funds and Their Principal With Fraud and Obtains Emergency Relief Against the Entities

The Securities and Exchange Commission today announced that it has filed charges and obtained emergency relief, including an asset freeze and the appointment of a receiver, against several St. Louis, Missouri private investment funds and management companies. The SEC alleges that Burton Douglas Morriss, the principal of these entities, misappropriated over $9 million of investor assets.

The SEC alleges that Morriss told investors that his private investment funds and management companies would invest their money in a portfolio of financial services and technology companies. However, investors were unaware that for the past several years, Morriss had been misappropriating their money to the tune of millions of dollars through a series of fraudulent transfers to himself and another entity he controlled. To conceal his fraud, Morriss later disguised these fraudulent transfers as personal loans.

According to the SEC’s complaint filed in federal court in St. Louis, Missouri, at various times between approximately 2003 and 2011, Morriss, his two private investment funds, MIC VII, LLC and Acartha Technology Partners, LP, and his management firms, Gryphon Investments III, LLC and Acartha Group, LLC, raised at least $88 million from at least 97 investors to invest in preferred shares or membership interests in the defendant entities. The defendants represented to investors that the investment funds would invest in early to mid-stage companies in the financial services and technology sectors.

The SEC alleges that unbeknownst to investors, for the past several years, Morriss has misappropriated investor funds through transfers from his companies to himself and another entity he controlled, Morriss Holdings, LLC, to pay for personal expenses, including, mortgage and alimony payments, payment of personal loans, pleasure trips, and household expenses. In an attempt to conceal his scheme, the fraudulent transfers that Morriss made to himself were recorded as “loans” on the defendant entities’ books. In fact, these transfers were never truly loans because Morriss did not intend to repay them at the time of his misappropriation. Moreover, the funds transferred to Morriss for his personal use were inconsistent with the disclosures contained in the offering materials provided to investors.

The SEC’s complaint also alleges that Morriss concocted a scheme to recruit new investors to purchase membership interests in one of his private investment funds without the unanimous consent of existing investors, as required. This diluted the investments of the fund’s existing investors.

On January 17, 2012, the Honorable Carol E. Jackson granted the SEC’s request for asset freezes, the appointment of a receiver over the entity defendants, and other emergency relief to prevent further dissipation of investor assets. The SEC seeks permanent injunctive relief and financial penalties against Morriss and the entity defendants, as well as disgorgement of all ill-gotten gains from them and the relief defendant Morriss Holdings, LLC. The SEC also seeks an officer-and-director bar against Morriss. In addition, the SEC’s action names Morriss Holdings, LLC as a relief defendant.

The SEC’s complaint charges:

Morriss with violations of Section 17(a)(1), (2), and (3) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5(a) and (c) thereunder, his aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and his violations or, in the alternative, aiding and abetting violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8(a)(2);

Acartha Group and Gryphon III with violations of Section 17(a)(1), (2), and (3) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5(a),(b), and (c) thereunder, and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8(a)(2), thereunder; and

MIC VII and ATP with violations of Section 17(a)(1), (2), and (3) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5(a), (b), and (c) thereunder.

SEC Charges BankAtlantic Bancorp, Inc. and Its CEO and Chairman For Misleading Investors About Problems in The Bank’s Commercial Residential Loan Portfolio and Engaging in Accounting Fraud

The Securities and Exchange Commission (SEC) announced today that it filed securities fraud charges against BankAtlantic Bancorp, Inc. (at the time of its misconduct the holding company for BankAtlantic, one of Florida’s largest banks) (“Bancorp” or “the bank”) and its Chief Executive Officer and Chairman, Alan Levan, with securities fraud intended to hide growing problems early in the financial crisis. The SEC’s civil complaint alleges that (1) Bancorp and Levan made misleading statements in public filings and earnings calls regarding the deteriorating state of a large portion of Bancorp’s commercial real estate portfolio in the first two quarters of 2007; and (2) Bancorp and Levan improperly accounted for loans they were trying to sell from this portfolio in late 2007 to minimize Bancorp’s losses.

The SEC’s complaint alleges that Bancorp and Levan knew that a large portion of the commercial residential portfolio was deteriorating early in 2007 due to the fact that many of the loans had required extensions because of the borrowers’ inability to meet their loan obligations. A number of loans were kept “current” only by extending the terms or replenishment of the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee (which approved the extensions and principal increases). Bancorp and Levan were also aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about the loans.

Despite this knowledge, Bancorp’s public filings in the first two quarters of 2007 made only generic warnings of what may occur in the future if Florida’s real estate downturn continued and failed to disclose the downward trend already occurring in its own portfolio. The steady deterioration of this portfolio constituted a known trend of the type that should have been disclosed in the Management’s Discussion and Analysis (“MD&A”) of Bancorp’s periodic filings, which were signed by Levan. Levan also made misleading statements to investors about the portfolio during earnings calls in the same time period. Bancorp finally acknowledged the problem in the third quarter of 2007 by announcing a large unexpected loss.

The SEC also alleges that Bancorp and Levan attempted to sell a number of the deteriorating loans after this announcement but failed to account for them properly as being “held for sale” as required by GAAP because doing so would have required Bancorp to write them down, incurring immediate additional losses. As a result of this scheme, Bancorp understated its net loss by more than 10% in its 2007 Form 10-K.

The SEC’s complaint charges Bancorp with violating, and Levan with violating and aiding and abetting, the antifraud provisions in Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder; Bancorp with violating, and Levan with aiding and abetting, the reporting provisions in Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; and Levan with violating the falsification of books and records, lying to accountants, and certification provisions in Section 13(b)(5) of the Exchange Act and Rules 13b2-1, 13b2-2, and 13a-14(a) thereunder.

The complaint seeks a final judgment permanently enjoining the defendants from future violations of these provisions of the federal securities laws and ordering them to pay financial penalties, and also seeks an officer and director bar against Levan. [SEC v. BankAtlantic Bancorp, Inc. and Alan Levan, USDC SD FL, Case No. 0:12-CV60082] (LR-22229)

Investment company act releases

Highland Capital Management, L.P., et al.

An order has been issued on an application filed by Highland Capital Management, L.P., et al. The order permits: (a) certain open-end management investment companies or series thereof to issue shares (Shares) redeemable in large aggregations only (Creation Unit Aggregations); (b) secondary market transactions in Shares to occur at negotiated market prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days after the tender of Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connectionwith the purchase and redemption of Creation Unit Aggregations; and (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Shares. (Rel. IC-29918 – January 17)

Rio Tinto plc and Rio Tinto Limited

An order has been issued to Rio Tinto plc and Rio Tinto Limited (together, Rio Tinto) under section 3(b)(2) of the Investment Company Act (Act) declaring Rio Tinto to be primarily engaged in a business other than that of investing, reinvesting, owning, holding or trading in securities. An order has also been granted under section 45(a) of the Act granting confidential treatment with respect to certain financial and other information. (Rel. IC-29921 – January 17)

Main Street Capital Corporation, et al.

A notice has been issued giving interested persons until February 13, 2012, to request a hearing on an application filed by Main Street Capital Corporation, et al., for an order pursuant to section 57(c) of the Investment Company Act of 1940 (Act) for an exemption from section 57(a)(1) of the Act. The order would permit a business development company (BDC) to purchase equity interests in a limited partnership from certain persons who are affiliated with the BDC. (Rel. IC-29922 – January 17)

Self-Regulatory Organizations

Designation of Longer Period For Commission Action on Proposed Rule Change

The Commission has designated a longer period for Commission action under Section 19(b)(2) of the Securities Exchange Act of 1934 on a proposed rule change (SR-FINRA-2011-069) filed by the Financial Industry Regulatory Authority, Inc. relating to post-trade transparency for agency pass-through mortgage-backed securities traded TBA. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66149)

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change filed by the NASDAQ OMX PHLX LLC (SR-Phlx-2012-01) relating to routing fees has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66155)

A proposed rule change filed by the Financial Industry Regulatory Authority, Inc. (SR-FINRA-2012-004) to modify and extend FINRA Rule 0180 relating to security-based swaps has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66156)

A proposed rule change submitted by The Nasdaq Stock Market LLC (SR-NASDAQ-2012-006) relating to options fees has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66158)

A proposed rule change filed by The NASDAQ Stock Market LLC to establish an Enhanced Display Distributor Fee (SR-NASDAQ-2012-005) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66165)

A proposed rule change filed by Chicago Board Options Exchange, Incorporated (SR-CBOE-2012-001) related to the extension of the CBSX individual stock trading pause pilot program has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66166)

A proposed rule change filed by Chicago Board Options Exchange, Incorporated (SR-CBOE-2012-002) related to the extension of a CBSX clearly erroneous policy pilot program has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66167)

A proposed rule change filed by the International Securities Exchange, LLC (SR-ISE-2012-01) relating to fees and rebates has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66169)

A proposed rule change filed by the International Securities Exchange, LLC (SR-ISE-2012-02) relating to fees and rebates for adding and removing liquidity has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66170)

A proposed rule change filed by the International Securities Exchange, LLC (SR-ISE-2012-03) relating to fees and rebates for adding and removing liquidity has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66172)

Accelerated Approval of Proposed Rule Change

The Commission granted accelerated approval to a proposed rule change (SR-CBOE-2012-007) filed by the Chicago Board Options Exchange, Incorporated pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to Decouple and Extend CBOE’s Credit Option Margin Pilot Program to January 17, 2013. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66163)

Approval of Proposed Rule Change

The Commission granted approval of proposed rule changes (SR-EDGA-2011-34; SR-EDGX-2011-33; SR-ISE-2011-69; SR-NYSE-2011-51; SR-NYSEAmex-2011-78; SR-NYSEArca-2011-72) submitted by EDGA Exchange, Inc.; EDGX Exchange, Inc.; International Securities Exchange, LLC; New York Stock Exchange LLC; NYSE Amex LLC; and NYSE Arca, Inc. pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to a corporate transaction in which Deutsche Börse AG and NYSE Euronext would become subsidiaries of Alpha Beta Netherlands Holding N.V. Publication is expected in the Federal Register during the week of January 16. (Rel. 34-66171)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.